Tuesday, 11 October 2011Individual Investors Need a Strong OmbudsmanOBSI. It looks like another boring acronym ... until your investment advisor screws up costing you money, refusing to reimburse or compensate you when you complain. Then the OBSI (Ombudsman for Banking Services and Investments) becomes a top of mind way to get redress.

It seems to have been doing too good a job, at least for investors, since the financial industry is now ganging up to undercut, criticise and opt out of OBSI being the one and only dispute resolution body (see various articles in the Financial Post over the last few months).

In fact, far from being watered down the OBSI needs to be protected and strengthened as a recent review commissioned by the OBSI Board suggests in the package of balanced recommendations that meets both consumer and justifiable industry interests. But the industry thinks the report is "delusional" according to a quoted reaction in a Financial Post article by Theresa Tedesco.

The financial industry needs to realize is that in-reality fair, and perceived-by-consumers to be fair, dispute resolution is good for it. One of the lasting psychological effects of the credit crunch is that bankers and investment dealers are a bunch of devious, avaricious crooks (witness the "Occupy" protests), lining their pockets and then letting taxpayers or investors take the fall. The industry's current campaign against OBSI reinforces the negative perception by showing unwillingness to fix errors or misdeeds . As both a shareholder in Canadian financial firms (directly and through ETFs) and an investor / consumer I want to see a fair, balanced system, not one that stacks all the advantages on one side (the FP Tedesco article cited above makes reference to the statistic that industry already wins 70% of cases adjudicated by OBSI - is it only 100% that is acceptable?).

It's not just perception either. When effective penalties are known to occur, firms will tend to improve their internal processes and controls so that problems don't arise in the first place. Industry calls this zero defects or six sigma. Consumers call this peace of mind.

What really needs to happen is for the federal minister of Finance Jim Flaherty to put the OBSI function on a stronger footing through permanent legislative authority on a national level, instead of its present voluntary, industry-funded status and to include insurance in its mandate.

If the Australian author of the report on the state of Canada's nationalombudsman for banking and investments thought his bluntly worded 94-pagereview would silence the criticisms against the organization that hired him,he's mistaken.

Phil Khoury's dismissal of the complaints levelled against the Ombudsman forBanking Services and Investments (OBSI) by many of its largest members as"somewhat baffling" has been met with derision.

"It's a complete delusional whitewash," said a source involved with thecomplaints filed by some of Canada's largest brokerage and mutual fundfirms. "It's not going to have any resonance with the industry because ithas no credibility and no integrity."

In a report tabled Wednesday, Khoury, a director of consulting firmNavigator Co. and a former Australian securities regulator, found there was"no substantive basis" for the months of hyperventilating by TD Waterhouse,RBC Capital Inc., Manulife Corp., Investors Group Inc. and others againstOBSI.

Khoury, who was hired by OBSI [ actually by the Board] to conduct the external review (mandated byregulators), praises the mediator of last resort and repeatedly suggeststhat while only minor tinkering is actually required to improve thebeleaguered agency, only a massive overhaul will slake the thirst of theindustry barbarians at the gate.

"We do not believe that the current impasse between industry and OBSI can beresolved in any sustainable way with only minor refinements," he wrote. "Thesituation has moved beyond that. We argue the resolution of the currentimpasse will require the active intervention of the regulators and amultifaceted package of reforms designed to act as a 'circuit breaker'. "

Khoury is right about the overhaul, but not necessarily for the reasons heoutlines.

The not-for-profit organization is the only consumer friendlydispute-resolution service available in Canada to the customers of the 600participating banks and investment firms. If folks don't agree with theirbanks or brokers on how to resolve a problem, they usually wind up at OBSI.

The investment industry has fumed that the way OBSI calculates losses isinconsistent and too one-sided in favour of dissatisfied clients.

But their main objection is about what they believe is a lack of integrityin the process because OBSI is not accountable and has no oversight fromregulators.

Meanwhile, consumer-advocate groups that have expressed similar complaintsabout OBSI's governance - and still do privately - have rallied around themediator, preferring to keep the devil they know rather than risking theunknown.

"From the outset, we've been absolutely perplexed by the hostile efforts toweaken and ultimately destroy OBSI," he said. And Mr. Pascutto, who is amember of OBSI's consumer advisory panel, says he's at a loss to explain whythe industry, which wins about 70% of the cases brought before OBSI, iswhining about having to pay out $3.8-million in awards in 2010 todisgruntled customers.

Even the fact that three of Khoury's eight recommendations involveoverhauling OBSI's board of directors and improving the agency's overallgovernance - issues at the heart of the industry's grievances - fails, atleast initially, to bridge the divide.

Worse, by demonizing the banks, brokerages and mutual-fund firms as fat catswho refuse to pay aggrieved customers, Khoury has merely widened the chasm.

The report appears to have entrenched the Street's view that OBSI is out oftouch with reality, and inflexible to its concerns.

Consequently, expect more financial firms to dig in their heels by refusingto act on OBSI's decisions and delaying the resolution process even further.How is that good for consumers?

Perhaps now would be a good time for the self-regulatory bodies that overseethe financial firms, and Canada's senior securities regulators, to step intothe bitter fray that, for the most part, they have avoided.

"...Although the starkly differentpositions of the sector and investor advocates are understandable, the spat itself seems unnecessary.For all of the grumbling from the sector, the[ ombudsman ]service it’s picking such a nasty fight withis not only its own creation but the impact by OBSI on the sector is much more benign than thehyperbole would seem to indicate. Some of the criticism portrays OBSI as a powerful force that isenabling clients to take advantage of the sector, soaking it for unwarranted compensation, but theevidence suggests otherwise. In fact, the securities sector still wins the majority of cases that comebefore OBSI. About two-thirds of the time, complaining clients are sent home empty-handed. In casesin which OBSI does rule in favour of the client, the amounts involved are simply tiny: for 2010, forexample, OBSI recommended total compensation to investment-sector clients of less than $3.4 million.For the sector overall, that’s a rounding error.Firms win before OBSI more than they lose; if they choose to follow its recommendations, the amountsthey (or their insurers) must pay out are inconsequential. Moreover, criticizing OBSI undermines thegood the sector has done itself by setting up the service. The exercise wasn’t entirely voluntary — OBSIwas created when the sector was under the threat of the federal government forming an industryombudservice. Nevertheless, the creation of a fairly simple, cost-effective alternative to litigation wasgood for clients — and for firms. As the PIAC points out, without OBSI, firms “could be facing muchmore substantial awards and a tidal wave of civil litigation,” adding that OBSI’s service benefits thesector by reducing costs while providing fair and efficient redress for investors. .."http://www.investmentexecutive.com/clie ... ilNews.aspid=59386&pg=2&IdSection=27&IdPub=215SIPA have proposed that Canada enable OBSI vialegislation as is the case in the UK, Australia and NZ. We agree.

(advocate comments.......pathalogical banks appear to be fighting over principle and not money.......the money involved is tiny, but the principle of giving fair and honest settlements for financial violence done by the banks is a principle they will fight to the end to NOT HAVE to pay)

NEWSFLASH OBSI In Critical ConditionCanada: Banks Stomp OBSI to Near Death

“In a shocking news development, we get word that a gang of extremely large, powerful and petulant banks have stomped the current Ombudsman for Investments to near death”!

In investigating the disturbing allegations we, like most Canadians, are confused as to why such large and powerful beasts would suddenly turn on such a small, frail, and youthful position.

For those requiring more background, the OBSI is the “ombudsman for banking services and investments”. This position was formed in the late 1990s when rumours were heard about a rampaging group of banks beating up small business owners and stealing their lunch money. No charges were laid as the surviving small business owners were hesitant to risk future lunch money. In 2002 the OBSI added the investment industry to its mandate; attempting to provide fair resolution to small retail investors who wondered how their current lunch money and future lunch reserves (RRSPs) had seemingly disappeared from their investment accounts. Of course many of these nest eggs were “prudently” invested by the gorillas in the Investment industry including of course the bank gang.

Many speculate that adding the investment bullies to the mandate of the ombudsman was short-sighted. Like a British police constable, the ombudsman carries no weapons when confronting these wild marauding gangs. Apparently the governments of the day felt that moral suasion and a proper upbringing would keep the gangs in line. Unfortunately, it would appear that power and greed have tilted the scale away from any fear of public condemnation. The large powerful bank investment firms appear to actually believe that whatever they do is always correct and any opposition is to be immediately crushed!

In fairness, it appears that the ombudsman did not even get his weapon (public disclosure) out of his holster before he was set upon. Despite clear warnings of the dangers, the ombudsman actually thought he was a respected friend of the gangs and appears to have walked into the back alley willingly and without back-up. One can only wonder at his surprise when the organized criticisms began raining down on his unprotected skull. Early word from investor advocates familiar with the case is that the ombudsman was guilty of having his own opinion on both the veracity of the banks documents and the claims made by the banks commissioned sales forces. Indeed, some have actually charged the ombudsman with talking to investors who lost their savings and in several radical cases, believing the word of a lowly common client over that of the banks commissioned sales person.

Medical staff tells us it will be some time before we know if the ombudsman will survive his injuries. While the powerless neighbourhood watch (investor advocates) keep a vigil at the hospital bedside of the ombudsman; the power, wealth and sheer overpowering influence of the gangs continues to threaten any recovery. Amid rumours that the gangs are looking at appointing their own “gang controlled” ombudsman to fill the void they are attempting to create; government and regulatory officials appear to be keeping a very low profile. Apparently the gang is so powerful even the government is leery of challenging their tantrum.

Back to you in the mainstream media for our next follow up on this troubling story......

(Banks are not interested in fair play and honest dealing with customer abuse complaints............read on)OBSI under savage attack

On Thursday May 12th officials from RBC Capital Markets Ltd., TD Securities and Manulife Financial Corp. met with securities watchdogs and industry self-regulating agencies to argue for changes to the way brokerage firms are forced to resolve disputes with their aggrieved customers. The meeting has took place at the offices of the Ontario Securities Commission, , in the wake of an unsuccessful attempt by RBC, TD and Manulife to pull out of a mandatory provision that requires brokerage firms to mediate through the Ombudsman for Banking Services and Investments (OBSI).Investor groups were not invited to the meeting. Instead of telling the dealers to show cause and support their allegations,/arguments , for OBSI was pressured to establish a consultation and put its loss calculation methodology on trial. We have asked for a copy of the minutes via Freedom of Information.

The consultation period ended July 25th with a unusual number of investor submissions. Comment Letters from industry were hostile and raised serious issues about how fair dealers are treating complainants . We have analyzed the industry responses. A copy of our report is available from kenkiv@sympatico.ca So in the dark is the IIAC about the role of an Ombudsman they actually said: “One matter that the paper does not address is what happens when the firm and OBSI staff have a differing opinion on the outcome of an investigation. While the Terms of Reference indicate that if the firm does not comply with the compensation recommendation, the details of the dispute will be published, this is an extraordinary remedy that loses its effectiveness if used too often over time. We recommend creating other options, such as formal mediation, that would assist in reaching balanced outcomes. [ http://www.obsi.ca/images/document/IIAC ... 5_2011.pdf ]” In other words , after the dealer has rejected restitution, OBSI has recommended restitution , a mediator should be called in! Of course this would add still more time for the complainant waiting for an answer and would defeat the whole purpose of an Ombuds service.

IIAC also stated in their Comment Letter: “ We also seek clarification on the stated principle in the Consultation Paper that disclosure does not validate an unsuitable recommendation. It should be clear that,although such disclosure may not make the investment suitable, if full disclosure is followed by informed client consent and direction to make the investment, the client must bear responsibility for losses relating to that investment.” We won't even bother to remark on this absurdity.

This problem had been brewing for some time . At the Feb. 23rd OBSI board meeting , Ombudsman Doug Melville painted a grim picture :”Mr. Melville stated that, while he did not want to overstate the issue, OBSI is experiencing a concerning escalation of minor conflicts with investment firms around matters that previously were not a material concern and this affects OBSI’s front-end process. These include:- refusal to sign consent agreements or requests for changes to longstanding consent agreement;- pre-emptive challenges to OBSI’s mandate with respect to specific case files before OBSI staff have had an opportunity to review the case for mandate;- refusal to sign the tolling agreement by firms not covered by the blanket tolling agreement covering most bank-owned financial groups;- refusal to provide or very slow to provide requested file information upon OBSI request;- increasing proportion of case files already under investigation or in the final stage of settlement are being escalated to OBSI senior management based on methodology used (particularly loss calculation and apportionment) and judgment with respect to application of fairness considerations to the facts of a specific case.”

During this period , at least 15 complainants have been denied restitution recommended by OBSI. because the dealers have rejected OBSI's recommendations. For whatever reasons, the OBSI board has decided not to make public the names or case details of the refuseniks. It was bad enough being financially assaulted but now the complaint process itself is taking a heavy toll amongst investors. There is no end in sight to this fiasco as cases no doubt are piling up.OBSI has been permantently mpaired and staff are demorized. Shame on the OBSI Board of Directors ,the CSA and Bay Street for putting complainants through financial and emotional distress.

Kenmar Associates Investor protection and educationBay Street vs OBSIOBSI's hands are tied“I think we've got a lot of work to do on the culture of complaint handling and dispute resolution in financial services,There are some firms that have worked hard at it, but we also see some behaviour that really suggests to me they don't get it. It's the tactics of delay, it's the automatic no, it's the attitude of, ‘Get this into the hands of legal and start the formal letters.'“ - former Ombudsman for Banking Services and Investments, David Agnew on his departure in 2009 . [ see June , 2009 Research Paper by Dr. P. Reeve FLAWED PROCESS, FAULTY PRODUCT for a discussion of industry complaint handling rules and process weaknesses at http://www.pjreeve.com/pjr/blog/Entries ... ULATION.ht ml ]August 9, 20111Kenmar Associates Investor protection and educationIntroductionPer Wikipedia, “ The modern use of the term [ ombudsman] began in Sweden, with the Swedish Parliamentary Ombudsman instituted by the Instrument of Government of 1809, to safeguard the rights of citizens by establishing a supervisory agency independent of the executive branch. ”. Today, an Ombudsman, such as OBSI, is used to provide fair, unbiased resolutions of financial consumer complaints . By design,their services are non-legalistic and participation does not require legal representation. Findings are not admissible in any subsequent litigation or arbitration. There is no charge to complainants for the use of OBSI's dispute resolution services. OBSI can also serve as a bulwark of financial consumer democracy in troubled times, protecting citizens and helping industry, regulators and government to improve in the face of a tough economy and fiscal constraint. But it is under attack by a group of investment dealers.Major Investment dealers are rejecting 15 OBSI recommendations for compensation This has only happened once before in OBSI's history, with a small mutual fund firm. Problems with industry participants have been brewing for some time- see Feb. 23, 2011 OBSI Board meeting minutes. http://www.obsi.ca/images/document/High ... D_s_Mtg_EN.pdf In this paper we offer the retail investor's perspective on this unnecessary fiasco .BackgroundPer the OBSI 2010 Annual Report ,the average and median compensation for in- vestment cases were modest - $19,121 and $8,205 respectively. OBSI recom- mended compensation in 78 banking case files and in 177 investment case files, with 100 % of recommendations being accepted by the firms involved. Complain- ants received compensation from their financial institution in just 20% of banking cases and 38% (177 of 468) of investment cases, representing a total of only $3,788,896 for all of Canada ( of this amount $3,346,138 was related to invest- ment cases) . Thus , almost two thirds of investment case complainants received NIL compensation. Just five cases were settled for an amount greater than $100,000 . Per the chart on pg 49 there appears to be one case that paid out $200,000 , the highest amount of the year. Frankly, we are surprised at how low these numbers are and puzzled why so much static has been generated on the is- sue of loss calculations.Of the major investment issues in 2010 ,Investment suitability was cited in 227 cases (48 %) , the most frequent cause of investment complaints out of a total of 468.Misrepresentation, fees, transaction errors , unauthorized trading and fraud make up the difference and are not affected by the issues raised by dealers.2Kenmar Associates Investor protection and educationNational Instrument 31-103 , a regulation investor advocates feel was an organized industry attempt to hijack the OSC's Fair Dealing Model, is the statutory basis on which suitability is founded. Section 13.3 of NI 31-103 provides that:Suitability (1) A registrant must take reasonable steps to ensure that, before it makes a recommendation to or accepts an instruction from a client to buy or sell a security, or makes a purchase or sale of a security for a client’s managed account, the purchase or sale is suitable for the client. (2) If a client instructs a registrant to buy, sell or hold a security and in the registrant’s reasonable opinion following the instruction would not be suitable for the client, the registrant must inform the client of the registrant’s opinion and must not buy or sell the security unless the client instructs the registrant to proceed nonetheless. NI 31-103 also states that the “registered representative is responsible for the advice given. In providing this advice, the registered representative must meet an appropriate standard of care, provide suitable investment recommendations and provide unbiased investment advice”.From this Instrument we see that each recommendation (transaction) must be suitable for the account . This is important because it is establishes a principle upon which OBSI bases its loss calculations and restitution recommendations.The OBSI Consultation http://www.obsi.ca/UI/Resources/WhatsNew.aspx? csid1=77 resulted from complaints from a several investment dealers. They assert OBSI is being unfair in their investigation methodology and loss calculations . Specifically they assert:1. As regards suitability ,OBSI should take at face value documents relevant to the case. These include but are not limited to NAAF, KYC , transaction slips, loan agreements, account statements and the like. It is felt that OBSI should not exercise discretion and judgment in weighing issues of credibility but instead should rely on legal and regulatory principles.2. OBSI should assess suitability in the context of a portfolio, not as a stand- alone investment ; additionally, that OBSI is not consistent in its approach3. OBSI client interviews may unduly influence the results especially as regards risk tolerance.4. The adviser makes recommendations but the final investment decision is that of the investor who receives regular disclosure and account statements5. OBSI should not award compensation greater than actual losses incurred on the basis that opportunity losses are akin to a performance guarantee3put forward ; #24 stated “That OBSI continue with and expand its one-to-oneliaison activity with participating firms, with a view to continuously improvingcooperation and complaint handling between the two parties.”] In our opinion ,all of the key recommendations have been satisfactorily resolved The next reportis due out next month. No doubt, it will be closely read and analyzed.Kenmar Associates Investor protection and education6. OBSI should not use benchmarks for notional portfolios on the basis that Index funds are rarely the basis for a complaint and Index funds are not generally held for long termsThe 78 page September 2007 Report of the Independent Reviewer concluded “ In the course of our review, we looked closely at OBSI’s written complaints handling procedures and how they are implemented in practice. Our conclusions were that the OBSI does provide a fair and balanced opportunity for both the participating firm and the consumer to provide documents and other information in support of their positions and that OBSI achieves the right balance as between the participating firm and the consumer”. http://obsi.ca/images/document/up- 7Independent_Review_of_OBSI.pdf [ 24 recommendations for improvement wereIn our view, OBSI staff conduct an independent fact-based assessment of suitability, the risk of investments and the sophistication and responsibility of the investor. This assessment is done with the benefit of information provided by the dealer and also from the complainant. Compensation recommendations based on such research are not now being accepted by some firms . The resulting impasse has led to undue delays for complainants in receiving compensation has created a growing backlog of long standing cases. Restitution is being with-held while this very public battle rages with no end date in sight.The financial and emotional pain of these delays on complainants has been severe and impaired the reputation of the dealers and OBSI . Investor confidence in the complaint handling system, which was intended to be a fair alternative to the longer and expensive litigation process is now in peril. OBSI has been unduly patient and not exercised its right to publicize the names and details of complaint cases where dealers have rejected OBSI's recommendations. Industry suggestions that this one power that OBSI has should be replaced with mediation makes a farce of the very concept of an Ombudsman. Industry participants assert that this is all about principles. We think it's more about a demonstration of power and influence. As Mammy Yokum says “ Sometimes you have to rise above principles” .[Ironically ,while this nonsense is going on in Canada, the UK's securities regulator, the Financial services Authority , fined 2 British Banks in January millions of pounds Sterling for deficient complaint handling systems. http://www.fsa.gov.uk/pages/Library/Com ... /003.shtml This included unduly lengthy processing times, unresponsive replies to complainants ,4Kenmar Associates Investor protection and educationpoorly trained complaint assessors , deficient analysis and use of available information and failure to disclose Ombudsman referral rights. Perhaps Canadian regulators should do a sweep of a few dealers to confirm that retail investors are being treated fairly?]In addition , there is the correct observation that NI31-103 permits dealers to select their own ombudsman as long as the entity is independent. Notwithstanding NI31-103, IIROC/MFDA member rules require investment and mutual fund dealers to utilize OBSI for all complaint investigations. Banking regulations and the Bank Act unfortunately do not. A Bank can leave OBSI as a participant at any time and pick their a dispute resolution service that better suits their needs. In fact, RBC Banking has done exactly that.Let us discuss each of the six points1. Use of NAAF / KYC as foundation documentsThe essence of the argument is that regulators provide a framework from which to ascertain suitability. Chief among these is the NAAF and the KYC .This, according to the industry participants , should be the basis that OBSI should use to determine suitability. It is argued that this structure provides a protection for investors within which licensed representatives mus operate. Industry participants argue that the OBSI proceeds on the erroneous premise that it can establish through its suitability and assessment process, the "actual KYC facts" that will be relevant to OBSI's assessment of whether advice was suitable, without being limited to the KYC information that the dealer actually collected or should have collected.We note parenthetically that Loss Capacity, income tax issues and liquidity are especially important suitability issues for seniors but not adequately dealt with on NAAF's. Loss Capacity is the ability to with-stand and recover from a bear market. It is primarily determined by age,health, income/expenses, time horizon and level of savings/net worth. It is not the same as Risk tolerance. Leveraging adds risk to a portfolio and undue risk , if it is unnecessary or excessive ,should also be a factor in OBSI's suitability determination(s).Our view is that neither OBSI nor industry participants deal with loss capacity adequately.Investor advocates state that the prevailing KYC system is dysfunctional and Canadian suitability standards are weak and ill-defined. Investment Policy Statements and Engagement Letters would help but they are not required by regulators and hence , infrequently used. This lack of regulatory engagement makes the OBSI complaint handling process much more difficult than it should be. Further, there is no requirement currently to provide personal rates of return5Kenmar Associates Investor protection and educationon client statements and client statements are generally very poor at communicating essential information.The Dec. 2003 OSC Regulatory Burden Task Force Report recommended that there should be a mandated KYC form with definitions that are moreunderstandable. Additionally, they stated:1. Registrants should be required to follow mandated procedures regarding their use of the form with investors.2. The form should require signature by the investor in all cases (with a copy retained by the investor) and all changes in the investor information contained in the form should require initialing by the customer.3. The form should also contain clear bold-faced instructions to the investor as to how to best use the form to protect themselves and how to pursue a complaint regarding their account, with the registrant and its internal ombudsman and, if necessary, with the OBSI [Ombudsman for Banking Services and Investments].4. The Commission and the IDA [now IIROC] should consider requiring registrants to send clients copies of their KYC form annually together with a request to advise the registrant if the information in the form should be amended.Source:http://hdl.handle.net/1873/608 2 None of these recommendations have yet been implemented. Investor advocates continue to press for these unaddressed improvements but progress has been very slow.The January, 2004 OSC Fair Dealing Model Concept Paper stated “ We continue to regulate most registrants on the basis of the products they sell, even though investors, firms and the courts consider the relationships formed and the advice given to be far more important than the actual sales transactions. The regulations allow an unacceptable lack of clarity which contributes to many of the problems in relationships between investors and advisers. Most retail financial services, including investment advice, are delivered by firms registered as dealers and their individual representatives. But the OSC‘s regulations only focus on advice as a business activity for a limited number of portfolio managers, investment counsellors, and newsletter publishers. For the majority of financial services providers, Ontario‘s existing product-based regulatory model has become6Kenmar Associates Investor protection and educationoutdated, yet we continue to tack new regulations onto it. ” Source: http://faircanada.ca/wp-content/uploads/2010/10/FDM.pdf Perhaps the current confrontation between dealers and OBSI will have a positive impact if it triggers a constructive review of the regulatory model from the retail investor perspective.New Account Application Forms (NAAF) try to assess a client's risk tolerance through checking off a few blocks on the form. The form contains only barebones and generalities. Too often it's like putting a square peg into a round hole. The client might have goals to save for a house or an education, but the forms only allow advisors to check off Objectives like "growth" or "income" or "safety of principal". They come without definitions of the terminology used ( e.g. “safe” apparently means “not guaranteed “) . Nevertheless, this is often the core basis used by “advisors “ in deciding on suitable investments. SRO's have also identified problems with KYC's.For example ,according to MFDA MR-0069 Suitability Guidelines :1. Where ranges are used, at times they are too broad. For example, long term time horizons defined as greater than 3 years and the top category for net worth is greater than $100,000;2. The NAAF does not collect sufficient information to assess suitability of particular products or investment strategies of the Member. For example, if selling exempt securities under the accredited investor exemption, the NAAF should include income and net worth information specific enough to demonstrate compliance with the exemption conditions. Another example, where a minimum time horizon has been established as a guideline for recommending leveraging, the time horizon on the NAAF should be able to support that this criteria has been met. MFDA Staff has also observed Members that define long term time horizon as greater than 3 years, which would not be adequate to determine whether the sale of a mutual fund with a deferred sales charge is suitable;3. KYC choices on the NAAF are ambiguous. For example, time horizon of “none” was interpreted differently by staff at a Member to mean either extremely long term or very short term;4. For joint accounts, Members have collected KYC information for each account holder rather than for the account itself. In some cases, the KYC information collected for each account holder conflicts and it is not clear what KYC information relates to the account;7Kenmar Associates Investor protection and education5.6.7. 8.KYC information that is inconsistent. For example, a client with a speculative investment objective and a low risk tolerance. A Member should either have controls to prevent such inconsistencies or have detective controls to identify and follow-up where inconsistencies are identified;Use of calculators or other formula that focus on ability to withstand losses rather than the lesser of the client’s willingness and ability to accept risk;Little or no explanation of terms used on the NAAF, including risk tolerance, investment objectives and time horizon;Where the model portfolio approach is used, little or no disclosure to the client regarding the composition of the portfolio, how the portfolio was selected and no statistical analysis to support its reasonableness; .....We could easily add a few more issues. IIROC requires one KYC for multiple accounts even though those accounts may have widely varying objectives and risk metrics. The MFDA is reviewing outsourced backoffice systems with respect to KYC and other issues. Dealers have voiced concern about the fact that an outsourced service provider is unable to make necessary changes within a reasonable time or without incurring significant costs. In some instances, third party back-office service providers have not made necessary changes to their core systems to meet new regulatory requirements or, alternatively, have made system changes that have resulted in non-compliance with MFDA requirements. Source: http://www.mfda.ca/regulation/bulletins ... 0484-P.pdf . This results in a deficient recommendation and a defective KYC post trade analysis.A detailed commentary on the shortcomings of KYC because of the industry transaction-based mindset can be found in the TAMRIS Special Report by respected portfolio consultant Andrew Teasdale Suitability, Minimum Standards & Fiduciary Duty in the Canadian Financial Services Industry available at http://www.moneymanagedproperly.com/New ... hnical.htm The document argues that the prevailing “Know Your Client” form cannot safeguard the suitability of a transaction because it cannot effectively relate the transaction to financial needs, existing investments, risk preferences or current risk/return relationships. It also reminds us that Canadian regulators need to deal with the client/adviser fiduciary relationship (sales commissions platform vs. unbiased professional advice), a movement rapidly gathering steam in the U.K. , U.S. and elsewhere.8Kenmar Associates Investor protection and educationThe Suitability Rules themselves are not understood by investors and investors are unable to assess a Dealer Member's compliance without further guidance as to the precise nature of the Rules and how they are to be applied in particular cases . Retail investors do not appreciate that the inappropriately labeled “NAAF” is in effect a contract and thus are not sensitive to how important each block ticked off may impact them in a future dispute./ complaint Additionally, investors do not possess the tools they need to knowledgeably assess whether a Dealer Member has effectively followed the Suitability Rules. Most retail clients of investment Dealers will have little knowledge of, or sophistication about suitability rules .The industry suggestion that where the legitimacy of the objectives and risk tolerance agreed to in writing is challenged, the complainant should be held to a very high standard of proof before it is accepted that, despite the fact that they may have signed the form, they did not agree with the stated objectives or that the risk tolerance was not appropriate in the circumstances must surely be disingenuous. These forms are not designed to amplify clarity- they are so imprecise that in most cases they amount to signing a blank cheque. Sometimes quite literally, the form is filled in by the Rep and signed by the client on the basis of trust in the Rep and his/her implied professionalism.The Canadian suitability standard is thus a weak standard and even it is not implemented well . There are numerous cases where account supervision was weak , the infamous Ian Thow case being an excellent example. We've seen KYC's that are not signed by investors and only find out about them when a complaint arises. There have also been documented cases of NAAF's being adulterated by advisers or client signatures forged . As a direct result of a weak KYC system , unsuitable investments have routinely risen to the top of the reasons for complaint list.Given all these known deficiencies it appears entirely appropriate , if not mandatory, that OBSI validate the KYC information. It would be irresponsible not to do so.2. The Portfolio ContextA professional financial planner would readily acknowledge that balancing of risks is an accepted part of investment advice, and "high risk" investments should be considered in the context of the client's overall portfolio holdings, rather than in isolation. If for example the equity portion of the client's holdings is conservative, an investment of a small portion of the total in an aggressive fund that might be unsuitable as a stand alone investment, could be suitable in the context of the9Kenmar Associates Investor protection and educationclient's overall holdings. This argument makes sense if the suitability regime were not transaction based and “high risk” investments really added to the portfolio stability.If some investments are uncorrelated with other investments in the portfolio, an otherwise unsuitable investment as a stand-alone security may indeed be suitable in a portfolio context . For example hedging US dollar securities with a gold fund may be perfectly acceptable. However this does not mean that “high risk” or speculative securities such as a Bre-X or Sino-Forest have a place in a portfolio. Registered dealer representatives should be prepared to rationalize and document their recommendations that use “risky “ securities during the complaint investigation and OBSI should take this into consideration when assessing suitability .“Manipulation of KYC and NAAF :There is a wide range of investment objectives in many New Account Application forms[ NAAF's], with the less risk averse and more aggressive options often allowing for aggressive trading and very high risk investments. Investors risk being pushed into more aggressive allocation profiles without being fully aware of what the profiles actually mean in terms of long term transaction costs, risk and return, and asset allocation.NAAFs and KYCs do not actually provide risk/return profiles relevant to the stated investment objective -What is the risk profile of the security or strategy that an advisor would consider appropriate for that actual profile and how would it affect the overall risk and return profile of the client’s assets? Indeed, once you study the NAAF and KYC, you find them incomplete with respect to the transparency of what the advisor is actually going to do for you. Combine this with little or no feedback on the relative risk and return and relative performance of accounts, and you find that the advisory segment of the industry is open to abuse and manipulation at a most fundamental level: -regulate the transaction, and ignore the wider service and representations made. The narrow frame of the current regulatory system is open to abuse and the average investor is not sophisticated enough to negotiate representations made and regulation of the transaction -based industry. “ Source: Andrew Teasdale , Point of Sale disclosure and regulatory failure in Canadian retail financial services , September 2010So, while we agree with a Portfolio approach, that is not how the Advice business actually works in most cases.3. Client InterviewsThere is an implied assertion that OBSI invites or welcomes complainants to10Kenmar Associates Investor protection and educationchallenge the KYC information collection process undertaken by the dealer and the advisor on the basis that the KYC information was not accurately recorded, that they did not understand the KYC forms they signed, that their advisor did not review the KYC forms or explain their significance or that disclosure was not understandable. This approach , it is argued, is akin to asking the complainant leading questions about the dealer's KYC process, that is likely to elicit responses concerning the dealer's KYC process that are self-serving and coloured by the client's dissatisfaction.We are not aware of any cases where OBSI investigators have unduly cast doubt on the KYC . In our experience they act as fact gatherers .Only when the investigator assesses that the complainant's version of facts is materially different than the documented KYC information do OBSI collect and consider additional evidence by interviewing the parties and conduct research to determine if the KYC forms reflect the investor's actual KYC information .To ignore a major conflict of information would be irresponsible. The result all too often is that the KYC information is in fact incorrect, inconsistent,stale or incompleteWe are however aware of a few cases where the OBSI investigator seemed to imply that the complainant was financially literate when they were not, that the complainant understood the risks involved when they did not and that the complainant was simply greedy and unhappy with the result. These however are rare. By and large , investigators stick to a ordered line of fact finding that is logical and is congruent with high standards of ombudsmanship. https://www.obsi.ca/images/document/up- ... ndards.pdf OBSI use internationally recognized service standards to build their Code of Practice in areas such as timeliness, accessibility, consistency and confidentiality. We note parenthetically, that dealer complaint systems do not make this declaration . And for good reason, they do not meet these higher standards. In addition , OBSI must comply with the Framework with the Regulators https://www.obsi.ca/images/document/up- 2Framework_with_the_Regulators_EN.pdf which includes a Fairness principle.We've observed KYC forms with investment objectives that are too broad or vague to relate to any specific trade or investment but that relate more to the overall objectives of the account (such as “retirement savings” or “tax planning”). In such cases OBSI must probe further. According to reports , MFDA Staff has observed the use of foggy terms including “capital preservation” and “speculative”. Where these terms are used, they must be appropriately defined in a manner to allow the client to understand what types of investments they relate to. It is left to OBSI unfortunately to compensate for a defective KYC regime.11Kenmar Associates Investor protection and educationThere is of course a risk that the the ombudsmanship standards may not always be met .We therefore would not disagree that interviews be monitored/recorded to ensure the fairness standard and independent objectivity is maintained.4. The Investor as decision makerIn one of the industry submissions investors are portrayed as informed decision makers, framing their decisions based on research, adviser communications and a knowledge of the risk/reward balance. They compare investing to the purchase of a home where a buyer does extensive due diligence. Another industry commenter stated “ .It should be clear that,although such disclosure may not make the investment suitable, if full disclosure is followed by informed client consent and direction to make the investment, the client must bear responsibility for losses relating to that investment.” Actually ,the suitability requirement is complementary to the fundamental obligation under securities legislation for dealers and their representatives to deal fairly, honestly and in good faith with retail investors. So, according to this commenter, it's OK to stick it to an investor , relying on an adviser for robust advice , with losses resulting from an unsuitable investment because some form of disclosure was made. Dealer Reps may feel morally licensed to offer biased advice once they've disclosed all the issues and conflicts-of-interest. Thus, disclosure can lead advisors to give even more biased advice to retail investors once they have disclosed their conflicts- of- interest and product risks.The OBSI argument that disclosure does not make an investment or strategy suitable if it’s otherwise mismatched with the investor’s objectives , personal situation, risk tolerance and loss capacity is just common sense.Deficient Risk disclosure is often at the heart of most complaints. A scan of IIROC complaint files shows that risk disclosure is weak or outright wrong. Two recent examples are the sale of non-bank ABCP unjustifiably described as safe and leveraged and inverse ETF's that were totally mis-sold to small investors.Investor advocates argue that most Canadian retail investors lack financial literacy. Indeed, that is why they are willing to pay for professional advice.“ In the case of mutual funds , the OSC research found that investors had a Grade 5 reading level and as a result ,insist on plain language disclosure for mutual fund investors. Canada’s Task Force on Financial Literacy has made public its report to the federal Minister of Finance, recommending urgent action on a national strategy to strengthen Canadians’ financial literacy.Complex investment products, especially complex income tax-reducing investment structures,complex leveraging arrangements and an increasing appetite for global exposure among investors, have made it increasingly difficult12Kenmar Associates Investor protection and educationfor investors themselves (as well as Dealer Reps) to determine whether certain products are suitable. To argue that a client must bear responsibility for losses relating to that investment if full disclosure is made and accepted by the client is tantamount to saying that investment advice has limited value and no accountability. The limitations of disclosure in the retail investment marketplace are well researched - see for example Mutual Fund Investors: Sharp Enough? http://www.canadianfundwatch.com/files/sharp-enough.pdfIn respect of the suitability of specific products, we can appreciate the statement on page 7 of the OBSi consultation paper , which indicates that OBSI may disregard the investment objectives, strategies and risk ratings published in a mutual fund company’s simplified prospectus. These are often merely broad boilerplate recitations and the risk ratings and disclosure in Fund Facts have been discredited by FAIR, SIPA, Morningstar , PIAC , industry participants and ourselves. It is perfectly appropriate for OBSI staff to exercise its own judgment to confirm these ratings, particularly when the ratings are known to be misleading.In our experience ,most retail investors do not do independent due diligence of investment recommendations. In the vast majority of cases, investors place a high level of trust in their “advisors”. This is confirmed by a number of studies including those conducted by IFIC www.ific.ca .Lofty marketing slogans strive to induce trust in the industry [ Invest with Advice , Freedom 55, “You're Richer than you think”, Buy, Hold...Prosper , Advice you can Bank On]. Too often,investors are lured into a relationship that is unfriendly , if not hostile, to them. They , especially seniors and retirees , are defenseless in this scenario. All this hype essentially puts the retail investors nesteggs in the hands of the dealers and their salespersons whom they trust, often unconditionally. So when unsuitable investments are recommended , the idea of an informed decision being made appears ill-founded. In reality , most Advisors” are transaction oriented, have no fiduciary duty, have not prepared meaningful financial plans for clients,do not utilize IPS's and rarely, if ever, provide personal rates of return vs. benchmarks5. Awards should be capped at actual losses incurredIndustry participants clearly are against compensating for “ opportunity costs ” - they feel compensation should be limited to losses actually incurred because the use of such a loss calculation mechanism could be considered an implied per-13Kenmar Associates Investor protection and educationformance guarantee .An argument is made that OBSI's loss calculation methodo- logy is silly since no one would posit that an investor should refund excess profits if the unsuitable investments provided a superior return to the suitable in- vestors.The advocacy community believes a compensation calculation that makes people whole from an industry that holds itself out as a trusted source of advice must include opportunity costs in certain circumstances. Some abuses we see are truly disturbing . The investment industry too frequently uses false and misleading representations as to the roles and titles of those they employ as "advisors". Further information regarding the misleading marketing practices that are considered standard operating procedure by the industry can be found at http://www.investorvoice.ca with particular attention to the MARKARIAN vs CIBC WORLD MARKETS discussion of false and misleading sales practices and title inflation by a Quebec Superior Court Judge. http://investorvoice.ca/Cases/Investor/ ... _index.htmIn certain cases restitution should not be limited to the loss incurred - for a senior or retiree especially, that would mean several critical years of potential earnings would be lost forever. It would mean that RRSP's/RRIF's could not be repaired. It would also mean that dealer Rep misconduct, misrepresentation , incompetency,negligence or fraud would not carry much financial risk for industry participants . Respected dispute resolver Robert Goldin lists 156 ways that a broker can be culpable http://www.macgold.ca/advisorfaultConceptually ,unsuitable investment recommendations are similar to unauthorized trades and therefore the loss calculation should include opportunity costs in certain circumstances. It is simply a matter of fairness. [OBSI is not a regulator -it cannot fine wrongdoers , order disgorgement or assign punitive damages. so opportunity costs are the only available route for fair compensation for demonstrably defective advice . The UK Financial Ombudsman Service uses notional portfolios [ portfolios chosen to mimic the likely suitable portfolio] to assess restitution. The Service has a Guide to Redress calculations at http://www.financial-ombudsman.org.uk/p ... es/QG5.pdf We believe OBSI should make publicly available its Practices and Procedures Manual- this would support transparency and increase understanding.We therefore support the OBSI position on opportunity costs applicability in select cases but OBSI should better define the boundaries for those cases ( as should industry dispute resolvers) . See http://www.financial- ombudsman.org.uk/publications/ombudsman-news/37/calculating-redress.htm14Kenmar Associates Investor protection and educationfor some case examples of the UK Ombudsman's approach to calculating redress for “ loss of investment opportunity”.6. Use of Indexes/benchmarksIndustry participants argue against the use of indexes . They state that securities that were suitable for a client might not be available within the index utilized, and the securities within that index may not be suitable for the client at the time the investment choice was made, or at any time during the time frame applicable to their investment. This results, in part, due to the fact that a benchmark is not adjusted to reflect the asset allocation that is suitable for the given client. It is also argued that the use of indices as benchmarks presents the issue of selection bias, confuses suitability with performance, fails to account for fees that would otherwise be applicable to a client (particularly where considered over a period of a number of years), and assumes consistency on the part of the client that may not reflect actual investing history.It makes perfect sense that working out the loss involves comparing the complainant's current position with the position they would now be in, if they had not been sold the unsuitable investment(s). We can therefore understand the use of indices as performance benchmarks under certain conditions. After all , industry marketing materials always use them to illustrate risk and performance. They also use indexes in preparing model portfolios or as benchmarks for portfolios. This may not be perfect but it is a practical , generally accepted solution to a tricky problem. As long as informed judgment is employed , there is full transparency for dealers and investors , and appropriate rebalancing is applied this should not be a material problem. We do agree that since indices are costless (and frictionless ) that performance should be reduced by fees for the comparable Index fund or ETF.Another alternative would be to use the average target return after fees contained in the financial plan ( if there is one).In cases where a suitable investment may originally have been discussed as an alternative to the unsuitable investment, it may be appropriate to award restitution based on that investment.In some cases there may be no conclusive evidence as to what suitable investment would have been decided upon , if the client had not taken out the unsuitable investment. In these cases, unless the circumstances indicate otherwise, we recommend compensation on a notional capital return, equivalent to Bank of Canada base rates during the relevant period + 1%.There is also a seventh major point to consider that was barely touched on by the Industry submission's to OBSI's request for consultation. That is mitigation . It can be a bigger factor15Kenmar Associates Investor protection and educationthan the choice of Index in determining the amount of redress. A big issue is the loss timeline with most dealers and OBSI using the legal principle ,that once a unsuitable investment is identified by an investor, they should take steps to mitigate further losses. Defining this point in time requires considerable judgment . It's difficult to apply for retail investors for a variety of reasons. In many cases, sales Rep's counsel to buy-and-hold , so investors don't sell even if the investment is unsuitable and losing money. Investor advocates argue that a sales Rep's duty includes sell recommendations , not just buy recommendations. Of course , other factors may delay mitigation such as hefty early redemption charges or the inability to sell the security prior to maturity. Investors may not even know , thanks to crappy account statements, that they've lost money until a sizable fraction of their portfolio has been depleted. Seniors may be ill/hospitalized, out of town for the winter or suffer from dementia.Further, behavioural finance researchers have found that contrary to expected utility theory, people place different weights on gains and losses and on different ranges of probability. They found that individuals are much more distressed by prospective losses than they are happy by equivalent gains. Some economists have concluded that investors typically consider the loss of $1 dollar twice as painful as the pleasure received from a $1 gain. OBSI should factor this human behaviour into its decision as to when mitigation should have occurred and publicly reveal its approach. Recommendation letters sent to complainants should clearly articulate how the mitigation date was determined.SummationMost of the industry commentary appears to be nothing more than a thinly disguised attempt to clip OBSI's wings. or dismember it. It appears too much fairness is a threat to some on Bay street The Canadian financial services industry either lacks an understanding of the role of a contemporary Ombudsman or is feigning this lack of knowledge. The ploy has been very “successful”. OBSI's reputation has been permanently impaired, OBSI staff appear intimidated/demoralized and core loss calculation methodologies based on fairness have been placed on trial.Shame on regulators for letting things deteriorate to this level. Regulators should focus on examining industry practices to see if they comply with recently passed complaint handling rules and if those rules are achieving their intended investor protection objectives. Based on the thinking displayed in the Comment letters it appears there's a lot more work to be done and as noted in the remarks by former Ombudsman David Agnew on the front cover of this report.The industry comments raise a number of investor protection issues. As a result,16Kenmar Associates Investor protection and educationregulators should ask the financial services industry to explain why the number of unsuitability complaints is so high . They should be asked to publicly reveal their loss calculation methods and justify them. They should be asked to justify why they do not compensate for “ opportunity losses”. They should be asked to correct glaring deficiencies in their investor protection protocols including , in particular , the Know-Your-Client regime.We fully concur that the overall objective of OBSI’s approach should be to determine a fair estimate of the financial position the investor would be in had the unsuitable investment advice not been given and acted upon. Investors pay for advice and when bad advice is given, clients deserve compensation. We don't disagree that an OBSI recommendation should be well supported but so should the dealer's original rejection of an investor complaint.Overall, we find the OBSI approach to be non-intimidating, logical , disciplined and fair to investors and dealers. OBSI appears to follow International Standard ISO 10003 Guidelines for dispute resolution external to organizations standards quite closely. From our experience , OBSI is well ahead of the more legalistic complaint handling processes and disclosure practices used by most investment and mutual fund dealers.The Joint Standing Committee on Retail Investor Issues needs to be reactivated. to deal with this critical issue. After an initial bold declaration by the OSC, MFDA, IIROC and OBSI in the Spring of 2008, little has been heard from this Committee. The original idea to create a permanent forum in which the four organizations could discuss the problems that afflict retail investors- and to work together on possible solutions- is even more critical today than it was 6 years ago. In the end , it may be necessary to enable OBSI via Federal legislation so investors are not dependent on an industry sponsored entity. Bringing the insurance industry into the fold would also make a lot of sense.The Minister of Finance needs to also ensure all Canadian Chartered banks use OBSI.( RBC Banking broke away from OBSI in 2008).We strongly recommend that the Canadian Securities Administrators should simultaneously revisit , update and tighten the FRAMEWORK to bring it in line with the 21st century . They should also start providing oversight for OBSI governance since OBSI is an integral part of the investor protection system in Canada . Some priorities would include governance, examination of forms used ,how the vast OBSI database can be used to improve investor protection in Canada and a detailed Guide on the criteria they must meet to be considered an independent Ombudsman service ( See the Australian Securities and Investments Commission document PS139 .Approval of external complaints resolution schemes )17Kenmar Associates Investor protection and educationPerhaps it's time for another Investor Town Hall. The 2005 OSC Town Hall proved to be quite an eye-opener for regulators- unfortunately, it has not been repeated since. The Town Hall brought out dissatisfied investors in droves . At the end of the prescribed time, there was still a long line of participants waiting to get to a microphone.Scene from May, 2005 OSC Investor Town HallAt the meeting, investors made it clear that they want regulators to address the following concerns: • the challenges they face when trying to navigate the complaints process • the desire for timely , fair and accessible redress• the need for the OSC to consult more with investors See A Report on the Ontario Securities Commission's Investor Town Hall for what regulators say they heard . We couldn't find it on the OSC website but it can be downloaded from http://investisseurautonome.info/compon ... ,CSA-ACVM- CVMQ-OSC-SEC-ETC%7Cdoc.342-OSC+Town+Hall+29+06+2005.pdf/Instead of public bitching about OBSI, dealers should embrace OBSI as an invaluable investor feedback tool. Investment dealers should take account of OBSI decisions and guidance in assessing a complaint. We believe that the guidance will help firms operate fairer complaint processes by applying relevant18Kenmar Associates Investor protection and educationlearning from ombudsman recommendations/investor dissatisfaction. This will be a WIN-WIN proposition for all concerned.Kenmar Associates staff19

On May 28th we sent an OPEN LETTER to regulators concerning the plan by 5 investmen dealers to disengage from OBSI and set up an external dispute resolution service more to their taste. We now realize that OBSI has been so compromised it cannot be salvaged in its existing state. Please see attached our letter to regulators .

We now state our support for the continued mandatory involvement of the OBSI as a means of redress for retail banking clients and investors and its enabling by an Act of Parliament . This is the mechanism in the UK, Australia and New Zealand. . Such an initiative is entirely consistent with a national regulator.As you may be aware , banks do not currently have to retain OBSI and RBC Banking has in fact dropped out ( in 2008). This huge gap in regulation is not in the public interest.

The banks and investment dealers must not be permitted to opt out of OBSI. The odds are already heavily stacked in favour of the industry in permitting financial assault to take place and then to avoid responsibility and compensation for wrongdoings. We believe it is critical that retail financial consumers should be able to count on fair, independent treatment in the resolution of their complaints.

The enormous costs of civilt litigation makes it an unrealistic alternative for most Canadians. The OBSI alternative is an important mechanism to keep the financial servicesindustry in line. Aggresive efforts by various industry players to opt out of OBSI confirm that its balanced recommendations sometimes hurt them and that it is doing credible work.

canadianfundwatch.com The Fund OBSERVER Mid- June , 2011 The voice of the retail investorTWO Questions1. Why doesn't CSA Chair Bill Rice acknowledge our request for a meeting on the OBSI fiasco? 2. Does anyone still believe the industry-regulator complex doesn't exist?OBSI is under attack:Doug Melville, Ombudsman for Banking and Investment Services can use your help. TD Waterhouse Canada Inc., Investors Group Inc., Manulife Financial Corp., Macquarrie Group and RBC Capital Markets are out to dismember OBSI .In a nine-page letter sent June 1 to the Canadian Securities Administrators (CSA), the Ontario Securities Commission (OSC), the Investment Industry Regulatory Organization of Canada (IIROC), the Mutual Funds Dealers Association of Canada (MFDA) and OBSI, FAIR www.faircanada.ca declared its support for “continued mandatory participation” for all investment dealers and mutual fund firms and “urges securities regulators to protect investors by resisting the attempt to undercut OBSI and render it ineffective.” Source: http://faircanada.ca/wp-content/uploads ... Letter.pdf SIPA www.sipa.ca has written Finance Minister Flaherty asking that OBSI be enacted by Federal legislation and be freed from all industry influence. We agree, the clench fist approach these firms have taken to independent complaint handling suggests client interests may not be first. Only a truly independent entity can assure fair restitution for industry wrongdoing. Contact your MP and/or Minister Flaherty and support an independent Federal Ombudsman service for banking, investments and insurance complaints.Hmmm..: TD Waterhouse pays $30,000 for contravening cease trade orders: BCSC [TDW is one of the dealers calling for dismemberment of the national independent Ombudsman www.obsi.ca ]INVESTOR ALERT issued: We regard the OBSI situation so critical to investor protection we issued a ALERT on June 3rd. In it we advised readers of the threat and implications. We also asked readers to contact Ministter of Finance James Flaherty to take action to prevent a fiasco. A copy of the ALERT can be obtained by contacting kenkiv@sympatico.ca.

By Ellen RosemanPersonal Finance ColumnistThe Ombudsman for Banking Services and Investments wants to hear from the public about how it deals with complaints from investors about unsuitable advice.

Some members of the industry-funded body are dissatisfied with the way OBSI assesses suitability cases and calculates the size of an investor’s loss that deserves compensation.

As a result, securities regulators asked the ombudsman to release a consultation paper. It’s posted online at www.obsi.ca.

OBSI’s role is to investigate complaints and try to resolve them in a manner that is fair and reasonable in all the circumstances.

Established in 1996, OBSI started resolving investment complaints in 2002. It can recommend compensation for investors going up to $350,000.

The process starts by looking at the “know your client” or KYC information gathered by the adviser when the account is opened (and updated later).

OBSI may interview the parties and do its own research to see if the information was accurately recorded during the period in question.

Investors often complain they didn’t understand the forms they signed or their adviser didn’t review them or explain their significance.

The next step is to look at the risks of the investments chosen by the adviser and compare them to the investor’s KYC forms.

“The fact that an investment has declined in value does not necessarily mean it’s unsuitable. Similarly, an investment that has performed well is not necessarily suitable,” the paper emphasizes.

Though securities law is based on proper disclosure or risks, OBSI says disclosure is not enough.

“Disclosing information or providing investment literature does not override the adviser’s obligation to recommend investments that are suitable for the investor.

“In other words, disclosure does not make an investment or strategy suitable if it’s otherwise mismatched with the investor’s objectives or risk tolerance.”

If OBSI believes the investments are unsuitable, it will try to determine what financial harm the investor suffered and what amount the firm should pay as compensation, if any.

“We typically calculate the performance of the unsuitable investments and then the position the investor would have been in had they been suitably invested,” it says.

“If the investor’s actual unsuitable investments performed worse than suitable investments would have, the difference is the investor’s financial harm.”

As the final step, OBSI looks at investors’ responsibility for any harm incurred — assessing their experience, knowledge and sophistication, their degree of trust in the adviser and their actions to prevent or limit losses.

“We will consider whether there was a point in time when the investor became aware or should have become aware that an investment, portfolio or strategy was problematic,” it says.

An alternate approach is to let the investor and firm try to negotiate mutually acceptable compensation without an impartial determination of loss. But this is not how a traditional ombudsman scheme operates.

“It should be noted that one of the key rationales for the creation of OBSI by the industry was the recognition that there is an inherent imbalance between investors and their firms/advisers.

“In particular, there is an asymmetry of information given the knowledge, skills and access to information available to the firms that are not similarly available to most investors.”

The ombudsman was created to give access to a free and independent dispute resolution service that includes, among other things, a determination of the amount lost, up to a specified limit.

“OBSI is an impartial body that does not, and should not, advocate for the investor (or the firm) as part of its process.”

Ellen Roseman writes about personal finance and consumer issues. You can reach her at eroseman@thestar.ca

another story about efforts by the investment industry trying desperately to expand their "vast reputation protection system". Apparently OBSI as a dispute resolution mechanism is "too fair", for our big banks. I hope someone finds this stuff of interest because it forms the foundations for financial abuse of each and every person in Canada, whether you invest with them or not.Below is the opening paragraph, and go to the link to FAIR for the entire thing.=========================================================================================================================

"Members of the financial industry hold themselves out as acting in the interests of their clients. This is also the expectation and understanding of retail investors. However, the law does not currently require financial advisors and firms to act in their clients’ best interests. FAIR Canada believes that a clear requirement that financial advisors act in a client’s best interest would bring the law in line with industry’s advertising and marketing and help protect investors. "

I greatly value your series on the OBSI. I tried to make a comment earlier today on your May 26 piece. Unfortunately it seems to hang up when I am attempting to post the comment to the comment section. Would you be able to forward the comment to the appropriate department. The comment is as follows:

I am very glad that you, Ellen, and the STAR have been covering this subject. There is a major problem with the OBSI being an industry-funded umpire. It refuses to uphold any responsibility for the question of lawful business practices; it will not look at the issues of fraudulent business violations of Sections 361-363 and Sec 366 of the Criminal Code, when a broker trades without authorization, and creates 7 year DSC fees without the consent or knowledge of the investor. Or fabricates false records of "unsolicited trade" in commission slips. This lack of fidelity to lawful business practices is creating a competitive disadvantage for Canada, in making Canadian investment less secure than in countries where the law is treated as everyone's obligation to uphold. We cannot rely on police services to govern this, when these police organizations have been persuaded that "the industry is self regulating".

(advocate intro.....this letter from an investor rights champion from Toronto, Ken Kivenko. He is attempting to sway investment regulators and self regulators from allowing rule changes which would allow investment sellers (your bank or mutual fund) to hire their own private dispute resolution mediators. Apparently they feel that the one industry complaint ombudsman is being too generous in awarding compensation to victims of financial violence and they would like to hire their own. RBC has already "opted out" of this industry approved system in favour of their own. (does that mean that RBC is a less safe/fair place to invest than the others?) Read on, as this letter is a good example of some of the "foundations" of how you, your children or your grandchildren will retire with about half of the retirement savings that they would in a different jurisdiction. Sure it is boring stuff, but it is truly your financial future these people are fighting over.)

Kenmar Associates have been actively tracking OBSI ever since it became the Ombuds service for investments in 2002. We have issued Reports on its decisions, its Annual Report(s) , its operations, its Terms of Reference and its governance . We have acted as Intervenors or supported complainants in other ways. We have issued a Guide for retail investors on how to deal with OBSI . Thus ,we feel qualified to comment on the current issue.A May 24 article in the Toronto Star " Brokers battle with ombudsman" http://www.moneyville.ca/article/996371 ... mpensation says it all. Canada’s large investment firms are fighting with the Ombudsman for Banking Services and Investments (OBSI). The article says they think OBSI’s decisions are too favourable to investors and too costly for industry members. They want to work with other complaint mediators just as the RBC's banking group did in 2008. According to the article, five investment dealers – TD, Manulife, Investors Group , Macquarie Group and RBC – met with you to seek exemption from mandatory participation in OBSI . While we were not invited to this meeting and have been unable to secure a meeting of our own , we take this opportunity to provide our viewpoint. The article says that you have denied their request, but asked OBSI to explain and justify the method used to calculate investment losses via a public consultation. The Consultation Paper has been released and we will comment on it. Our comments here are laser focused on the retention of OBSI as the sole Ombud service for handling MFDA and IIROC Complaints. Clearly,the industry is exploiting a defect in of National Instrument NI 31-103 [ para 13.16 ] as the rationale to move to an independent dispute resolution service framework of their choice .This would not be in the public interest . While OBSI is viewed by many with suspicion due to a perceived pro-industry bias in recommendations , weak governance , excessive cycle times, and 100 % industry financing , it remains in many cases ,the only option available for aggrieved investors to gain some measure of restitution. Legal remedies are unaffordable for the vast majority for most complaints submitted to OBSI . They are simply not large enough to justify costly and time consuming litigation but large enough to adversely impact the lives of Canadians. In Q1,2011 OBSI made recommendations for monetary compensation or facilitated monetary settlements totaling $792,280, representing 29% of all closed case files. 17% of banking services case files and a whopping 41% of investment case files ended with a recommendation for monetary compensation or facilitated monetary settlement. An additional three case files (2% of closed case files) ended with a non-monetary recommendation or facilitated settlement .Compensation Total Average MedianOverall $792,280 $14,672 $7,569Banking Services $103,037 $6,869 $1,000Investments $689,243 $17,673 $9,078

In fiscal 2010, OBSI recommended compensation in 78 banking case files and in 177 investment case files, with an astonishing 100 % of recommendations being accepted by the firms involved. Complainants received compensation from their financial institution in just 20% of banking cases and 38% (177 of 468) of investment cases, representing a total of only $3,788,896 for all of Canada [ this is less than the tiny OBSI annual operating budget of$7, 335,746] . Just 5 cases were settled for greater than $100,000 . About 63 % of total OBSI costs were related to investments. Among IIROC firms, TD Waterhouse Canada was the subject of the most cases ( 72 vs. 46 in 2009), while BMO-related firms (BMO InvestorLine Inc., BMO Nesbitt Burns Inc. and BMO Nesbitt Burns) were the focus of 26 cases. Ironically, both firms are on the Board of Directors. On the MFDA side, Investors Group Financial Services Inc. was the subject of 24 cases, followed by WorldSource Financial Management with 10. These results indicate that the numbers involved are very small . So small, in fact that we believe they represent only a small fraction of prevailing investor abuse .In any event ,it appears that a mountain is being made of a molehill by a few firms. OBSI is generally recognized as the nation’s banking and investment Ombudsman. The Ombudsman can serve as a bulwark of financial consumer democracy in troubled times, protecting citizens and helping industry, regulators and government to improve in the face of a tough economy and fiscal constraint. See http://www.gouvernance.ca/publications/09-06.pdf for a review of the Ombudsman as a producer of better governance. Here are our main reasons for retaining OBSi as the sole Ombuds service approved by the CSA: OBSI provides a one-stop point of entry for complaint resolution. Distressed investors require simplicity in working their way through the convoluted financial services industry complaint handling process.OBSI are constrained by the FRAMEWORK worked out by regulators and must comply with its specifications.Every 3 years OBSi is subjected to third party review providing some assurance the service is functioning properly and keeping up with Best Practices around the world.By its nature, OBSI has a treasure trove complaint database entrusted to it. This database can be mined to help develop better practices in the financial services industry , not just assess complaints. Prevention will reduce complaints and make Canada a safer place to invest. OBSI's cross Canada complaint database can be used to identify systemic issues at the national , regional or dealer level. It could , if used properly, provide an insight into long term industry issues. For example , OBSI have identified the NAAF/KYC system deficiencies as a root cause of investor complaints and a factor in complicating the analysis of complaints.OBSI is much more transparent than any for- profit dispute resolution services.Permitting MFDA/IIROC dealers to retain multiple dispute resolution service providers of their choice would lead to confusion and inconsistencies in the processes and methodology used in resolving investor complaints.

Eliminating the requirement for member firms to participate in the OBSI would create an alternative complaint handling network laced with conflicts- of- interest with little oversight by regulators . Retail investors would be at a huge disadvantage under such a regime. We expect that the for-profits would be more motivated to retain business than be fair to complainants. This would further weaken investor protection in Canada .

A for-profit Ombuds service paid for directly by dealers would never be trusted by investors These points makes it essential that mandatory use of OBSI be preserved .The cost of litigation is simply too much for most Canadians to bear especially after they've lost a money. Internationally, other Ombuds services are an Agency of Government established by legislation as is the case in the UK, Australia ,NZ and elsewhere . By all accounts these are working very well. e.g.UK Financial Ombudsman Service (FOS) attacks banks handling of investment complaints http://www.moneymarketing.co.uk/investm ... 52.article In Canada, the banks and dealers are attacking OBSI. Latest FOS Annual Review at http://www.financial-ombudsman.org.uk/p ... 1/ar11.pdf (152 pages) See page 40 esp. Read also page 104 How Consumers feel about complaining.

OBSI has already been irreparably damaged by the public disagreement. Of course the real problem to be `` fixed`` is the abuse sales Reps are inflicting on Main Street. OBSI is only the symptom of the problem. The KYC system is broken and suitability standards are weak and ill-defined. Investment Policy Statements would help but they are not required by regulators and hence ,infrequently used. We note also that, in most cases, sales Reps owe no fiduciary duty to clients . These systemic regulatory deficiencies are the root cause of the majority of complaints . OBSI does have serious governance issues and excessive cycle times but their job is made more difficult by working within a weak regulatory foundation Because of all the negative publicity and hostility , OBSI will never be the same again. Intimidation and threats now hang over their head- funding formulas and budgets will be real battles.- loss calculations will be a persistent irritant-more cases will end up in Court or dropped by worn out investors Investors will now not accept that OBSI is independent [if they ever did]. OBSI has been emasculated and permanently impaired . We recommend that the CSA engage with OBSI to stabilize it and rebuild staff and investor confidence. This will require ,at a minimum, changes to NI31-103 and the FRAMEWORK The CSA / OSC should sit down with the investor advocacy community and discuss this Category #1 issue face to face . After all, investor protection is JOB #1.Without an independent OBSI, investors will have to get involved with costly , lengthy and frustrating civil litigation. We add parenthetically that a compensation calculation that makes people whole from an industry that holds itself out as a trusted source of advice must include opportunity costs. The abuses we see are truly disturbing . It is supported by false and misleading representations by the industry as to the roles, titles, and compensation of those they employ as "advisors".Further information regarding the misrepresentative marketing practices that are considered standard operating procedure by the industry can be found at http://www.investorvoice.ca with particular attention to the MARKARIAN vs CIBC WORLD MARKETS discussion of false and misleading sales practices by a Quebec Superior Court Judge. http://investorvoice.ca/Cases/Investor/ ... _index.htm Investors are lured into a relationship that is unfriendly to them. They are defenseless in this scenario. That is why loss calculations employing notional portfolios play a crucial role. OBSI should explain their methodology in more detail but the general concept is correct. If it were any other way , restitution would be limited to the loss incurred - for a senior or retiree especially, that could mean several critical years of potential earnings would be lost forever. It would mean that RRSP's/RRIF's could not be repaired. It would also mean that reckless behaviour would not carry much financial risk for industry participants .We think of unsuitable investment recommendations as unauthorized trades and therefore the loss calculation should include opportunity costs. OBSI is not a regulator -it cannot fine wrongdoers , order disgorgement or assign punitive damages. so opportunity costs are the only available route for fair compensation for demonstrably defective advice . THE UK Ombuds service routinely uses notional portfolios to assess restitution.

In conclusion, Kenmar Associates supports continued mandatory OBSI participation for MFDA an IIROC dealers and urges securities regulators to protect investors by resisting any attempt to dismantle OBSI. We urge the CSA, IIROC, and the MFDA not to buckle under to intense industry pressures to revise Section 24.A.1 of MFDA By-law No. 1 and IIROC Rule 37.2 and to remove the definitive requirement for dealers to participate in the OBSI complaint assessment process.

In fact ,we urge regulatory reforms to strengthen the accountability and independence of OBSI in the public interest. Further , the financial services industry should be asked to explain why the number of OBSI complaints is so high and growing . They should be asked to reveal their loss calculation methods and justify them. They should be asked to justify why they do not compensate for “ opportunity losses”. They should be asked to correct obvious deficiencies in their investor protection protocols.

We understand that OBSI currently has about 15 cases in which there’s a stalemate and the firm refuses to follow its recommendation. According to OBSI's Terms of Reference they should be publicly revealing the names of the firms that refused to accept their recommendations. That hasn't happened, further weakening OBSI's claim of independence. The faster this invented problem is resolved, the faster these citizens can get on with their lives.

We would welcome an opportunity to meet with you and discuss this critical issue.

Should you wish to disclose or post this letter on websites , permission is granted.

This cartoon accurately depicts 99.99% of Canadian regulators who act as reputation protection systems for the financial industry.

The following was provided to OBSI in response to a call for comment on their consultation paper on "suitability" etc. It is dually posted in the investor advocate site in the section titled GET YOUR MONEY BACK due to it's expected use in helping abused customers in this regard.

The jury is still out as to whether or not OBSI is simply another industry body paid to protect and enhance the reputation of the industry, even at the expense of honesty and integrity to the public. They are currently in a battle with major financial players in Canada who are not in favour of how they judge investor losses and investor compensation, soooooooo if the banks are leaving OBSI (Royal Bank the first) they may in fact be doing a better job than this author has given them credit for. Time will tell. History will judge.

Thank you for the well reasoned and well written consultation paper on investment suitability. I would like to add a comment or two which I hope might add to the discussion.

Each of my comments may be difficult for the industry to swallow or to agree with, as each one I feel addresses issues of honesty and fair play in providing an investment service:

As nearly each person in Canada is representing him or herself as an "advisor", and each company is advertising and promising a similar service to the public, honesty and fair play is a fair expectation by members of the public.

In this regard, it is unsuitable when choosing a mutual fund to recommend to a client, to choose the one which pays the highest commission possible, and may include a higher management fee (and lower investment performance) as a result. Unfortunately the vast majority of mutual fund choices are sold with the DSc option, which is arguably the "most suitable" choice for the compensation of the seller, and not for the customer. So, in this regard, I might suggest that something like "four out of five" persons who call themselves "advisor" are failing in their duty to advice fairly and honestly and instead are choosing the most suitable product for commission earning purposes instead of for customer benefit. This is an industry wide failure with sales statistics (mutual fund sales) to back it up. Some source info found at http://www.investoradvocates.ca and a post script comment on sale of "house brand" mutual funds at end of this posting**.

Secondly, a long term investment rule or principle that has always held, but I have never seen it actually enforced, is the rule of "best execution". It refers to order execution, and it requires customer orders to receive the best price they possibly can receive. I again, point out that more than 80% of mutual fund "advice" is contrary to this rule, and if it were to be enforced, customers would be owed a refund for any mutual fund purchased with a high commission choice (DSC for example), when there are identical but cheaper (or less restrictive) alternatives available for the customer. The practice of selling the highest commission choice has become "standard industry practice, but again, fails in the honesty and fairness testing.

Third, is the written principle or rule of providing the client with true, clear, plain disclosure. When I was witness to several hundred million dollars of sales of mutual funds while I worked in the industry for two decades, I noticed a great deal of time and effort dedicated to NOT informing the customer of his or her investment choices, but rather an extreme dedication to hiding these choices, while informing the customer that the highest commission generating choice was the best for him or her. It was a classic case of a hundred million dollar "bait, and switch" operation, whereby the customer is led to believe that their best interest and best advice would be provided, while actually providing them with information that only supported the highest commission and or fee generation choices. see http://www.examiner.com/crime-in-calgary/larry-elford

Unfortunately the sale of investments is, and was done by commission salespeople, without disclosure to the public that this has always been the case. It is a constant reminder of the principle of DECEPTIVE MARKETING PRACTICES, as outlined in the criminal provision of the Competition Act of Canada. It is supported by false and misleading representations by the industry as to the roles, titles, and compensation of those they employ as "advisors", and this may be another violation of the criminal code of Canada. Fortunately the industry has self regulating privileges, which give it the powers to "decriminalize" any behaviours that are advantageous to the industry. InvestorAdvocates has considerable information available to the public about this at viewtopic.php?f=1&t=173

It is expected that one day, the privilege of self regulation, which allows decriminalization and willful blindness of rules and laws, will be eased out in favour of client first principles which are actually enforced, and not just written down for appearance. I would like to thank OBSI for it's efforts in this regard.

Post Script comment. Using IFIC sales stats, more recent examples of the "four out of five" salespersons go for the highest commission or fee, rather than the most suitable investment product, are found in the sale of "proprietary" or "house brand" funds. According to the OSC Fair Dealing Model, these funds earn up to 26 times more money for the investment firm than selling independent products. It is like walking into a restaurant, asking for advice on the "best" wine in the place, having your waiter bring you a $300 bottle of his recommendation, and you never knowing that he made it in his own basement. Not very professional, ethical, or even legal, but with the bait and switch style of investment advice in Canada, a licensed salesperson (or dealing representative) can misrepresent himself to the public as something other than what he is licensed as, or how he is paid. Assante Artisan and Optima funds probably the very best known and best documented case in Canada of doing this to clients, pumping up the value of the company and selling it off for $800 million.

Canada’s large investment firms are fighting with the Ombudsman for Banking Services and Investments (OBSI), which can review client complaints and recommend restitution of up to $350,000.

They think OBSI’s decisions are too favourable to investors and too costly for industry members, in some cases. They want to work with other complaint mediators.

Five investment dealers – RBC, TD, Manulife, Investors Group and Macquarie Group – met with securities regulators to seek exemption from mandatory participation in OBSI earlier this month.

Regulators denied their request, but asked the ombudsman to explain and justify the method used to calculate investment losses.

“We are confident that we are resolving complaints fairly. We welcome oversight by the regulators to provide assurance to all stakeholders that we perform our mandate in the public interest,” says Doug Melville, the lawyer who has headed OBSI since 2009.

In a consultation paper to be released later this week, the ombudsman will try to address the industry’s concerns and seek public support for keeping the status quo.

What’s behind the battle? I think there are three issues at stake.

Participation isn’t mandatory for banking disputes.

The federal government encouraged banks to set up and fund their own complaint handling system in 1996.

But in 2008, Canada’s largest bank (RBC) started using ADR Chambers for all its banking complaints. The federal government did not intervene.

While setting a precedent for OBSI’s banking operations, RBC’s move had no impact on the handling of investment complaints.

All members of Canada’s two national self-regulatory groups – the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA) – had to join OBSI in 2002. They can’t pull out unless the rules are changed.

Investment complaints soared after the 2008 market crash.

When stock prices fell by almost half from September 2008 to March 2009, many people looked at their investment portfolios to see how suitable they were for their age and stage of life.

If they had too much exposure to stocks, they filed a complaint with their investment dealer – and later with OBSI – as a faster and cheaper option than going to court.

However, OBSI handles complaints in a different way than a court would. When analyzing suitability, it looks at an investor’s asset mix going back many years – and not just before the 2008 crash.

In doing this, it’s departing from the trend to adopt a statute of limitations for investor restitution in court cases. In Ontario, investors can sue firms for only two years after they become aware of problems.

OBSI takes account of opportunity costs.

Some investment firms want to limit the compensation to the actual losses suffered by an investor. They may throw a bit of interest into the settlement.

OBSI, however, looks at the opportunities an investor gave up by adopting an unbalanced portfolio.

Suppose you complain about losing money because you were overweighted in stocks. You ask OBSI to investigate.

It starts by looking at the form you had to sign when opening the account (often called the “know your client” or KYC form), which sets out your knowledge, experience and investment goals.

If the recommended strategy didn’t fit your objectives, OBSI then tries to apportion responsibility between you and the investment firm.

Finally, OBSI sets up an imaginary portfolio that is suitable for your needs. It compares the sensible portfolio’s performance with the actual performance you achieved – trying to get you back to where you’d have been on day one if you hadn’t agreed to the unsuitable recommendation.

In two-thirds of cases, OBSI doesn’t recommend that the firm compensate the investor, Melville says.

However, OBSI currently has about 15 cases in which there’s a stalemate and the firm refuses to follow its recommendation. This ongoing quarrel is hurting investors and needs to be resolved quickly.

Ellen Roseman writes about personal finance and consumer issues. You can reach her at eroseman@thestar.ca.

The google doc link above should take you to ADR Chambers 2010 Annual Rpt RBC Banking.......an alternate dispute resolution process that RBC has elected to go with while trying to avoid the OBSI system.

It strikes this author that RBC might prefer to hire its very own judge and jury in order to have greater control over the outcome of any disputes that come it's way. My thoughts are that this process should be avoided like a Kangaroo court should be avoided. Abused and violated financial clients should (if they can) pursue any financial predator in an open, reasonably unbiased court of law, and not in an arena where the referee is chosen, bought and paid for by your opponent. I could be wrong on some exact specific details and I await and welcome corrections to come my way.